KPMG Work Private 01 2013

Working with Private Equity

Portfolio Companies

Views of chairmen and senior management on working effectively with portfolio

companies and creating value

January 2013

The sample

Currently working in private equity-backed

company

Involved in business at time it was acquired

by private equity

85% worked with two or more private equity-backed companies

Yes No

47% 53%

47%53%

Most recent role in private equity-backed company

13%

14%

31%

27%

15%

Chairman

Other Executive Director

Finance Director

Other NED

CEO

About the surveyThe survey was carried out in two phases:

•Anonlinesurveyofmorethan300senior executive and non-executive directors from the Directorbank network. The respondents came from a wide variety of sectors covering all deal sizes, but were concentrated in the European mid-market.

•Confidential,in-depthinterviewswithafurther23directorssourcedfrom both KPMG and Directorbank’s contacts – all of whom had experience

working with several private equity-backed businesses over a number of years. The executives represented a wide variety of industry sectors and werebasedinEurope,AsiaandtheUS, with a higher proportion working in the larger buyout space.

More than 85 percent of the participants in this survey worked for more than one private equity house, providing a credible basis for comparing different approaches.

Source:DirectorbankandKPMG,2012


Best practice in portfolio management

2

©2013KPMGInternationalCooperative(“KPMGInternational”),aSwissentity.MemberfirmsoftheKPMGnetworkofindependentfirmsareaffiliatedwithKPMGInternational.KPMGInternationalprovidesnoclientservices.Allrightsreserved.

Contents

Introduction 02

Resultsataglance 04

Managingportfoliocompaniesmosteffectively 06

Whatmakesanoutstandingprivateequityboarddirector? 07

Useofoperatingpartnersandindustryadvisers 10

Theroleofoperatingpartnersinprivateequity-backedcompanies 12

Thesevendeadlysinsofportfoliomanagement 13

Whenthegoinggetstough:Managingunderperforminginvestments 14

Theroleofthechairmaninprivateequity-backedcompanies 16

Waysprivateequityfirmscangenuinelyaddvalue 18

Conclusion 20

Acknowledgements 21


Introduction

Globally, private equity remains an attractive asset class, outperforming public markets over medium to long-term investment periods. However, exactly how these alpha returns are generated remains less well understood. Furthermore, analysing private equity returns by performance quartiles reveals a great deal of variation; from the top quartile funds which producesignificantalphatothefourthquartilefundswhichactuallyloseshareholdervalue.Giventhis,wecanseethattheuseof‘valuelevers’suchasleverage,multiplearbitrage,operationalandprofitimprovementisfarfromformulaic.

Webelievethatasprivateequityfindsitselfinamoredifficulteconomicenvironment,itwillhavetoevolvefurthertomeet the challenge of the slowdown of growth in developed economies. This is likely to lead to an increasing role for effectiveportfoliomanagement,asthevalueleversofoperationalandprofitimprovementbecomemoreimportant.Ittherefore seems an opportune time to explore how private equity managers add value to their portfolio companies and whatcharacterisesthemosteffective,incomparisonwiththosethatarelessso.Askingthosewhohaveworkedcloselywith private equity, namely senior executives and non-executive directors of private equity-owned portfolio companies, many of whom have worked with more than one private equity investor, seems a good place to start.

Wehopeyoufindthisresearchinterestingandconstructive.Theresultsrevealedthemanybenefitsoftheprivateequitymodel and a variety of approaches to working with portfolio companies. We will leave you with the thought that although someofthefindingsmayseemself-evident,sometimesprivateequityfirmsdonotalwaysgetthebasicsrightwheninteracting with management and the board. This research should give food for thought and some guidance on what the300-plusseniormanagerswhotookpartinoursurveybelieveconstitutesbestpracticeinportfoliomanagement.


2


Robert Ohrenstein Partner, KPMG in the UK

Ken Brotherston ExecutiveChairman,Directorbank

The results revealed the many benefits of the private equity model and a variety of approaches to working with portfolio companies.


3


Results at a glance

Main reasons private equity firm won the deal were:

Most valued contributions to deal process were:

Inmid-2012,KPMGandDirectorbankcommissionedindependent research consultancy Private Equity Research Limited to undertake a comprehensive surveyofmorethan300non-executivedirectorsand senior management who had experience ofworkingwithprivateequityfirms.Thepurpose was to look in depth at how private equity executives interact with their portfolio companies and reveal the strengths of the private equity approach, as well as the weaknesses. Our aim in carrying out this research is to contribute to the development of best practice in this key area, through increasing our private equity clients’ understanding of the issues that arise when working with senior management and the board.

The research reveals that private equity directors are generally highly regarded for their deal-making andfinancingskills.However,according to participants in the survey, their effectiveness when interacting with portfolio companies is more variable. The most effective make a real effort to build a relationship of trust with management and actively use their skills, knowledge and network of contacts. The least effective are perceived to add more limited value, apart from providing capital.

108

102

87

71

66

56

47

Bid highest price

Certainty of completion

Ability to complete quickly

Plans for growing business

Personal chemistry

Offered best management terms

Industry sector knowledge

Number of respondents 358

While bidding the highest price was mentioned most often, a wide variety of softer factors are important; providing an opportunity for PE firms to differentiate their propositions.

Number of respondents 358

Testing of business plan

Conducting due diligence

Arrangement of debt

Deal process management

Industry knowledge

Organising legal documentation

Experience doing similar deals 99

83

81

79

79

40

39

Ways private equity firms contribute to the deal process go well beyond simply arranging the financing.



4


How different are private equity firms’ approaches?

Very different

Similar

Very Similar

N/A

Somewhat different21%

37%

24%

5%

13%

Private equity houses adopt different styles and approaches to managing theirinvestments; adapting their approach to the circumstances.

Private equity’s contribution to value uplift: Ratings of private equity input:

Excellent

Average

Poor

No response

Good

2%

18%

39%

29%

12%

Over half rated PE input as good or excellent and less than an eighth poor.

No

. of

men

tio

ns

0-4% 5-10% 11-25% 26-50% 51-75% 76-100%

35

44

38

9

5

0

40 percent of respondents gave the private equity house credit for generating more than a quarter of the value uplift on exit.

Was there an appropriate level of involvement by the private equity backers?

78%

22%

Yes

No

The vast majority said that the level of input they received from private equity backers was appropriate for the needs of the business.



5


The majority of those surveyed rated the quality of the private equity director’s involvement in the business as good or excellent.

Ratings of quality of private equity input:

However,with41percentratingthequalityofprivateequityinputasaverageorpoor, there is clearly room for improvement and the respondents had a number of suggestions on how it could be done better.

Excellent

Average

Poor

No response

Good

2%

18%

39%

29%

12%

Managing portfolio companies most effectively

The amount of involvement by private equity firms varies and the appropriate level depends on the needs of the business working to agreed benchmarks. Private equity should be relatively hands-off if the business is performing on plan but if not, greater involvement is needed and should be welcomed.

Chairman, Retail sector

CEO, Packaging sector

The private equity firm had operational experience so they were able to help solve problems, support management and were a bit like a personal coach. It was a fine example of how private equity can work.

NED, Pharmaceutical sector

It’s easy to sit on a board and ask the right questions – the hard part is knowing how to find solutions and execute a plan.

Effective ways of working• Have a very open and honest dialogue – especially with regard to exit strategy.

• Have either operational understanding or access to advisers with relevant experience.

• Allocate sufficient time and input to the strategic planning process.

• Spend more time on the business, not just at board meetings.

• Truly understand the business, the competitive landscape and influences – not just the numbers.

• Cut back on the number of performance indicators requested and quickly identify the key levers.

• Have fewer private equity professionals and more independent directors on the board.

Marc Moyers, HeadofPrivateEquityAmericasRegion, KPMG in the US Our respondents consistently rated the input they got from private equity firmsveryhighlyduringthepre-dealandcompletionphasesandontheexit. During the period of ownership, however, the quality of input was more variable and it appears to us that this is the main area where some firmsandindividualsaredifferentiatingthemselves.

KPMG’s view



6


What makes an outstanding private equity board director?

Respondents were asked to rank the top three qualities that a private equity director should have:

1. Abilitytoworkwiththeboard and management

2. Strategic vision

3.Financialacumen

Other abilities mentioned as being important, but less so, were being able to introduce the company to contacts who could be useful to the business and having operational or sector expertise.

No

. of

men

tio

ns

Ability to work with board/

management

Strategic vision

Financial acumen

Access to contacts

Operational experience

Industry sector

knowledge

Knowledge of capital markets

213 208

126 125112 109

77

Quality Examples

Ability to work • Abletoassesswhethermanagementarecapableofdeliveringwith board/ the plan.management • Buildsarelationshipbasedonopennessandtrust.

• Canfocusontheneedsofthebusinessandnotgetdistracted by the next deal.

• Ifthingsgowrong,workswithmanagementconstructivelytofind solutions.

Strategic vision • Goodknowledgeoftheindustryandunderstandsmarketcontextand trends.

• Ideallyhashadsomebusinessexperienceoutsideprivateequity or finance.

• Actsasasoundingboard;givesawell-considereddifferentperspective on issues.

• Intellectualflexibilityasnotwobusinessesarethesame.

Financial • Goodunderstandingofdebtstructuresandcontactswithfinancialacumen institutions.

• Spendsthetimetoreallyunderstandwhatishappeninginthebusiness;behindtheheadlinenumbers.

• Experienceassessingacquisitionopportunitiesandfocusing management on ROI.

Private equity people are better deal makers than operators given that their backgrounds are mainly in M&A. Some tend to be deal junkies and get bored when there’s not much happening with a business, butthemostsuccessfulPEpeopleare good at deal making and working with companies.

Chairman, Several sectors



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Operational experience gives them more empathy with management and understanding of the challenges and pitfalls of achieving the strategy. Having operational experience means that their input is practical rather than theoretical.

FD, Software sector

All private equity executives should, during the first 5 years of their career, be seconded to a portfolio company. This would make them far more effective portfolio directors.

CEO/Operating Partner, Industrial sector

The best combination is a PEdirectorwhohasbothsectorand operational experience as well as internal credibility.

NED, IT sector

Should private equity executives have operational or industry sector experience?

The results of our research show a high degree of consensus on this topic, with private equity directors’ lack of operational or management experience seen as a weakness in the way they interact with portfolio companies. Over 70percentofthoseinterviewedsaidthat having managerial, operational or sector experience would give private equity executives more insight into the reality of running a business and a greater empathy with management.

Those respondents who had worked withprivateequityfirmsoveranumberofyearswerescepticalthatfirmswillchange their recruitment policies and seek to hire more investment executives with operating expertise. However, privateequityfirmsdoseemtobeaware of their limitations in this area and have sought to complement the skills of their team through the increasing use of operating partners or industry advisers.

Honson To, HeadofPrivateEquityAsiaPacificRegion,KPMGChina

The debate on whether it is necessary to have operational experience continues. Our view is that a one-size-solution does not fitall.Thekeypointisforfirmstobe aware of what their investment professionals are good and not so good at and make sure that they have the correct blend of skills withintheirteams.Additionally,secondments to portfolio companies could provide very useful training experiences.

KPMG’s view


8


The best private equity directors…

“Offeradviceandexternal insight without trying to decide strategy orrunthebusiness.”

CEO, Industrials sector

“Arewillingto‘walkthe floor’ with the

managementteam.” CEO, Chemicals sector

“Areabletoengagewithemployees at all levels, not be the mysterious people from a private

equityhouse.”CEO, Industrials sector

“Lookforopportunitiestousethefirm’s

network of contacts with suppliers, customers,

other portfolio companies tobenefitthebusiness.” Chairman, Automotive

sector

“Stayinterestedandinvolved with the

business throughout the timeofownership.”

Chairman, Media sector

“Don’tpanicwhenthingsaren’t going according to plan, but work with management to really

understand what is going wrong and constructively to

findsolutions.” COO, Food & Drink sector

“Areexperienced–ageand maturity play a

part with private equity executives getting better

overtime.” Chairman, Leisure

sector


9


Use of operating

partners and industry

advisersKen Brotherston, ExecutiveChairmanThis is an area where private equityfirmsdoaddenormousvalue but are often not given credit for being the catalyst that enables access to this expertise. We are also seeing, to some extent, a partial in-sourcing of operational expertise by private equityfirmsastheybolstertheirinternal capabilities. This is more prevalent at the top end of the market, but we expect to see more of this in the mid-market.

Directorbank’s view


10


Asnotedearlierinthisreport,privateequityexecutivescontinuetocomemainlyfromfinancial,M&Aandmanagement consulting backgrounds, and private equity firmshaverecognisedthattheyneedtobringinoutsideexpertise to drive operational improvements. They hire in this expertise at the outset when assessing an opportunity and for help in carrying out commercial diligence, as well as after the deal has been completed to assist management in achieving the business plan. Our survey found that in60percentofcases,businesseshad100-dayplansor similar which mapped out the actions to be taken by management, together with timescales. While the majority ofprivateequityfirmsmadesignificantcontributionstodeveloping the plan, only about one-third were said to be actively involved in its implementation. Several respondents observedthatprivateequityfirmsneedtoworkmorecloselywithsmallerfirmsthanlargerbusinesseswhichtend to have greater management resources. With the latter, they can afford to be more hands off.

Large private equity houses tend to make greater use of operating partners and industry advisers. These senior executives are employed to bring strategic insight or helpwithinfunctionalareas,rangingfromIT,marketing,and purchasing to human resources. Our respondents commented that although some smaller and mid-market firmsdothistoo,ittendstobelargerfirmsthathavebetternetworksandgreaterfinancialresourcesthatenablethem to hire the very best industry experts.

Certainpitfallscanarise,however,inusingoperatingpartners who:

• Haveambitionstorunratherthanjustadvise the company.

• Arenotinsidersintheprivateequityfirmsodonotunderstand the management structure and where the decision-making power lies.

• Defertotheprivateequityfirmratherthanactingas an independent adviser.

• Donotappreciatethatallcompaniesaredifferent and what worked before might not be applicable in this situation.

MostPEhousesdonothaveoperationalguys in their team – they bring them in on a deal-by-deal basis. That is a weakness because these guys do not understand how thePEteamticks.Ifyouhadoperationalpeople on the deal team, you’d shortcut a lot of processes.

NED, Telecommunication sector

In today’s climate, the model where there is greater operational input is best suited – management needs help to go through difficult times.

CEO/Operating Partner, Packaging sector

Private equity is such a closed industry club that they don’t know many people outside their own pool. Firms shouldn’t hire people with operational background as investment managers, but search out the best in the business in particular functional areas (sales, marketing, finance, etc) and bring them into their fund as roving operating partners.

CFO, Business Services sector


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The role of operating partners in private equity-backed companies

A chairman’s view

David Williams,SerialChairmanand ChairofOperatingPartnersatDukeStreet

What qualities should operating partners have?

Asyouwouldexpect,operatingpartnersneedtohaverelevant senior managerial and sector expertise as well as strong interpersonal skills. Further, if they are really plugged intotheprivateequityfirmandhavebuiltupamutualunderstanding through working together over time, this canmakearealdifferenceintheefficiencyofhowdecisionsare made.

Even people with stellar business backgrounds do not always work successfully in a private equity environment. They need acertainamountofconfidenceandemotionalintelligenceto cope with being challenged by the bright, young, driven individuals who work in private equity. Being an ex-chairman ofaFTSE100companydoesnotcountforthatmuch–theyhave to earn the respect of management and private equity backers.

In your opinion, what is the ideal make up of the board?

• Achairmanwithrelevantsectorexperience,preferablyone who works as an operating partner for private equity backers.

• Aseniordirectorfromtheprivateequityfirmandusuallyamore junior colleague for back-up cover.

• Keyexecutivemanagement.

• AnindependentNEDwithsector-specificknowledge.

The board needs a balance of skills; for instance, it can sometimesbecomeoverweightinfinancialskillsandthisneeds reining back. We consider that executive management is much more important than the rest of the board – they are fundamental to the success of the business.

What are the pitfalls to avoid when using operating partners or non-executives?

They may become too engaged and think they are supposed toberunningthebusiness.Itisuptoprivateequitybackersto make this clear at the outset so that management do not think they are being superseded.

Do you think private equity executives should have operational experience?

Inmyexperience,somedohaveoperationalormanagerialexperience and can bring a lot to the boardroom table. Ihaveseenprivateequityexecutivesreallydeveloptheirskillsinthisareaduringtheirtimeintheindustry.Asaresult,they can make a real contribution to the people issues and challenges of running a business.


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The seven deadly sins of portfolio management

Our research reveals that private equity directors vary widely in the way they interact with portfolio companies; some actions are helpful while others not. Respondents were very clear on the latter and from their experience gave advice on how to avoid common pitfalls.

1. Fail to win hearts and minds of management; taking the attitudeof“weownthebusinessthereforeyou’lldoaswesay.”

2. Overwhelm management with interference which is not helpful or constructive; especially when the business is performing on plan.

3. Lose focus after the deal is done as shown by missing board meetings or being distracted during meetings.

4. Manage by spreadsheet so focus only on historic numberswithoutunderstandingKPIsandwhatisreallyhappening with the business.

5. Turn the deal over to a portfolio management department so that management has to try to establish a relationship with an executive new to the deal who may see it in a different light.

6. Be a frustrated CEO who thinks he or she can run the company but in fact has no relevant management experience.

7. Have an unclear internal decision-making process or lack support from senior colleagues so that management doesnotknowwhocanspeakforthefirm.

They will charm the birds out of the trees to get the deals, but most have never worked in industry and so have no real experience of running a company.

NED, Several sectors

Although private equity people I’ve worked with are extremely clever and analytical, their inter-personal skills are not as strong.

Chairman/CEO, Technology sector

It is unhelpful when they ask for loads of data but don’t focus properly on where the business is going and how it’s going to get there.

CFO, Business Services sector

They brought me in to drive change but failed tobackmewhenIhadtoconfronttheCEO and majority shareholder.

NED, Telecoms sector

AsanNEDIhavehadtotrytofindasolutionforaprivate equity director who was constantly on his Blackberryduringtheboardmeeting.Managementtook a lot of trouble with preparing the board papers and they got really upset about this behaviour.

NED, Logistics sector

Private equity firms’ core competency is doing deals, so theirskilllevelsforthedealprocessarehigh.Buttheirreal understanding of, and strategy for, the businesses they acquire, is usually much weaker.Chairman, Electronics sector


Ken Brotherston, ExecutiveChairmanAlthoughitwouldbeeasytodismissavoidingthesepitfallsas ‘just common sense’, senior executive respondents remarked that investment professionals are not always gettingthebasicsright.Someprivateequityfirmsmaybenefitfromtakingacriticallookatthemselvesandaskinghow they can improve the way they interact with portfolio companies.


13


When the going gets tough:

Managing underperforming investmentsManagement were open and took a ‘no surprises’ approach to dealing with the private equity firm. The private equity director didn’t try to push the bad news under the carpet but discussed with them what to do about it and gave constructive advice and suggestions. The management team responded very well to this approach.COO, IT sector


14


Most of the seasoned executives and non-executives we interviewed had experienced situations where a business underperformed against plan. When the going gets tough, the relationship between management and private equity backers can come under strain. When this happens, private equity directors naturally become concerned at the potential threat to the value of their investment and need to be very aware of how their skills can help, rather than make things worse. The non-executives and executives interviewed for this research suggested constructive actions that private equity directors could take to help address underperformance.

KPMG’s view

Onno Sloterdijk, Head of Private Equity EMARegion, KPMGintheNetherlandsUnderperformance may move the relationship between the private equityfirmandmanagementfromone of alignment to possibly a more combative one, especially if the private equity house perceives that management is underperforming. Ifactionisrequiredtosupplementor change management, then shareholders need to act decisively to avoid the risk of further damage to the business. Unsurprisingly, the survey revealed more negative comments on the behaviour ofprivateequityfirmswhenbusinesses underperformed, but also gave useful pointers on which actions help and which actions hinder. The key takeaway is to recognise the changing nature of the relationship and if management are to be retained, then working collaboratively becomes key.

Actions that help

• Really understanding the business; get beyond the spreadsheets.

• Working with management collaborativelytofindsolutionsto business problems.

• Staying calm, being aware that all parties come under pressure duringdifficulttimes.

• Refinancing and restructuring the balance sheet to give the company breathing room.

• Bringing in operational expertise from a network of experts.

Actions that hinder

• Being indecisive.

• Getting too much into the detail so that the big picture is lost.

• Lacking empathy with management; often they are doing the best they can.

• Failing to stay around to clean up the mess once the equity value is gone.

When things go wrong, private equity directors tend to start trying to manage the investment more closely. However, unless they really understand the business then their input isn’t usually very helpful. The better a private equity director understands the business, the easier it is to identify issues at an early stage so they can be dealt with before becoming nasty surprises.

When an investment underperforms, there is a tendency for them to want torunaroundanddothings;demanding regular updates and conference calls. This is all about being seen to be taking action rather than really contributing to finding a solution.

There are bound to be some up and downs in the relationship if the business isn’t performing according to plan, but the important thing is whether or not management and investor can work together and keep focused on the main goal of achieving a good exit in due course.

NED, FMCG sector

CEO, Chemicals sector Chairman, Business Services sector


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The role of the chairman in

private equity-backed companies

Our research suggests the appointment of an effective chairmancanmakeasignificantcontributiontothebusinessthrough, among other things, ensuring the relationship between private equity and management remains collaborative.Ourresearchrevealedthat78percentofrespondents felt that the aim of private equity backers and management was well aligned at the start, but for close to one-third of our sample, the relationship worsened over time. Reasons given were usually related to private equity backers

being unclear or changing their minds about the strategy forthebusiness.Conflictsoverthetimingandtypeofexitwere also not uncommon and often arose through lack of understanding by private equity backers that management’s motivationsmaynotbesolelyfinancial.Respondentsofalltypes – both executive and non-executive directors – said that an independent chairman has a vital role to play as an interface between management and its backers.

An effective non-executive chairman can:• Translate and navigate the unfamiliar world of private equity for management.

• Filter the private equity firm’s demands which may be unnecessary and a distraction to management.

• Advise management on exit options, apart from outright sale, which can meet both parties’ objectives.

• Ensurethereisagoodcomplementofskillsontheboard.

• Help renegotiate incentive plans if things work out differently from the original plan.

• Ensurefairvaluewhentheprivateequityfirmislookingtosellonbutmanagementis staying in with another backer.

• Add value through their operational knowledge and industry expertise.


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The chairman has a very difficult role to fill in dealing with the egos of private equity executives and management. If there’s conflict the chairman needs to bring it out in the open and broker a compromise between them.

The biggest battle for the chairman is getting management onside. You are often viewed as the private equity firm’s spy on the board and they’re also afraid that you have plans to try to run the company yourself.

Private equity backers tend to take a shorter term view of the business than management, so it’s up to the chairman to balance what’s best for the business in the long run and bring all parties together.

Chairman, Several sectors Chairman, CEO, Leisure sector Chairman, Several sectors


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Ken Brotherston, ExecutiveChairmanInarecentstudyconductedbyDirectorbank,430chairmenandNEDsconsideredthequalitiesdifferentiating a good and an outstanding chairman.

Thekeyfindingshighlightedacombination of personality traits and skills that make the difference: they are good listeners, effective communicators, have gravitas and often a degree of charisma. The key skill set includes an ability to see the big picture; good at managing meetings; striking the right balance between effective governance and effective outcomes; broad market experience and good business acumen and, most important of all, allowing the CEOandtheexecutiveteamtorunthebusiness.Inshort,notnecessarily making decisions, but ensuring good decisions get made. The chairman must also, of course, ensure that investors and wider stakeholders have the best possible relationship with the business.

Ways private equity firms can genuinely add valueAspreviouslyhighlighted,privateequityreturnscontinuetooutstripquotedshares and it is certain that operational improvement in portfolio companies isakeycomponentofvaluecreation.Ofoursample,63percenthadbeeninvolved with a private equity-backed business which was subsequently sold and,ofthese,77percenthadbeensoldforaprofit.Accordingtothesurvey,themost important contributors to the value uplift were operational improvements and sales growth. Leverage and growth through acquisitions were much less important;highlightingperhapstherealityofthemoredifficultfundingclimate.

Approximately40percentoftherespondentscreditedprivateequitywithcontributingmore than a quarter of the value uplift achieved on exit. This is a clear indication that privateequityiscapableofgeneratingasignificantamountofvalue.Fortherestofrespondents who estimated the value uplift at 25 percent or less, this still represents material incremental value which contributes to private equity’s ability to outperform public markets.

Whereprivateequitymadeasignificantcontributiontothevalueuplift,itwassaidto be through the following means, in rank order:

1. Provided capital to grow business

2. Optimised business plan

3. Removed constraints on management

4. Brought in operational expertise

5. Other (including dealing with banks)

Thefindingthatthemajorityofoursampleascribedamoderatefiguretoprivateequity’s contribution to value uplift may surprise private equity executives – but not management.Intheireyes,privateequitybackersareviewedasenablers;meaning

No

. of

men

tio

ns

26.2

22.4

18.0

10.48.8

Operational improvements

Organic sales growth

Multiple arbitrage

Acquisitions Leverage

No

. of

men

tio

ns

0-4% 76-100%5-10% 11-25% 26-50% 51-75%

35

0

44

38

95

Contribution by importance to value uplift Private equity’s contribution to value uplift

Source:DirectorbankandKPMG,2012 Source:DirectorbankandKPMG,2012


18


that their ability to contribute value is focused on areas such as providing access to capital and bringing a greater focus to achieving an exit. Management, and for that matter non-executive chairmen, tend to believe that real value creation comesfromgrowingthebusinessandimprovingprofitability–and this is down to the executive team.

However, respondents acknowledged that in some cases, private equity directors are able to make much greatercontributions–intherangeof30–50percent of the uplift in value.

We should point out that respondents’ views on the contributionprivateequityfirmsmaketovalueupliftwereestimates and not usually based on detailed analysis.

Ways to add more value• Givingaccesstothefirm’snetworkofcontacts.

• Making sure acquisitions/projects make an acceptable ROI.

• Identifying acquisitions.

• Focusing attention on cash flow management.

• Optimising the balance sheet through re-leveraging.

• Accelerating process of good financial reporting/governance standards.

• Groomingcompanyforsale,findingpotentialbuyers,structuring the sale.

Robert Ohrenstein, Global Head of Private Equity, KPMG in the UK Itisdifficulttoquantifyprivateequity’sroleasenabler –especially in ‘soft’ areas like making sure the right management team is in place and supporting it to achieve the business plan. However, most respondents recognised that private equity made a real contribution tothebusinessandmanyascribedasignificantproportion of the value uplift to their input. Even at levels of 5–25 percent of the uplift, we suspect that most limited partners would be happy if their private equity managers contributed incremental value over public markets at these sorts of levels.

KPMG’s view

Private equity firms can add value through their knowledge of financing and contacts with banks, even very seniorCEOsdon’tusuallyhavethisknowledge.

CEO, Financial sector

If a firm has chosen a good management team and is able to manage them well, are the good results downtomanagementorthePEhouse?Hard to determine, but I’d put the figure more at 30 percent.CEO/Operating Partner, Packaging sector

I think they can contribute more than a quarter of the value uplift – this usually happens at the beginning and end of the deal. Often the sale would not have happened or on such good terms if not for them.CEO, Support services sector


19


Conclusion

This survey has produced a lot of useful feedback on the ways that private equity executivesaddvalueandinteractwithportfoliocompanies.Thefindingsareespecially credible, given the number and quality of the respondents who took part in the research and their willingness to give insiders’ views on what really goes on in private equity-backed businesses. The positive feedback relating to privateequity’saddedvalueintheentry,financingandexitphasesshouldbenosurprise to those within the industry.

However, the feedback on the contribution made by private equity houses to businesses under their ownership was more mixed. While many respondents werehappytogiveprivateequityfirmssignificantcreditforthevaluetheybringto their investments, it would be fair to say that a small number questioned the quality of private equity’s input and the effectiveness of how they work with management.

The industry is adapting to the harsher economic environment and there appears to be a general recognition that generating value within the portfolio will increase in importance as a source of returns as leverage, arbitrage and ‘asset trading’ opportunitiesbecomelessprevalent.Asaresult,wehaveseensomeevidenceofashiftinskillsetswithinfirms;notablythroughin-sourcingoperationalandsectorexpertise.Thishasbeenthecaseforlargerfirms,andthistrendisalsobeingseenin the mid-market.

Robert Ohrenstein, Global Head of Private Equity, KPMG in the UK This research adds a different perspective to the debate over the ability of privateequityfirmstoaddvaluewithintheirportfoliocompanies.Withthechallenging current economic circumstances likely to persist for some time, privateequityisrefiningitsmodelandsomefirmsarealreadyattheforefrontofthisevolution.Giventhemoredifficultfund-raisingenvironment,portfoliovalue creation will increasingly be seen by limited partners as a point of differentiation.Evenfirmswithaboveaverageinvestmentperformancearebeing challenged to demonstrate how they will add value to their investments in the future. Our long involvement with private equity tells us that this is a very adaptable industry with an extraordinarily high proportion of talented individuals.Nodoubtmanyarealreadyfocusingonsomeoftheissuesdiscussed in this report.

KPMG’s view


Ken Brotherston, ExecutiveChairmanWe believe that having the right blend of skills, from a variety of internal and external sources, means that private equity’s input is likely to be more effectivewhich,inturn,driveshigherinvestmentreturns.Thosefirmsthatget the balance right and interact most effectively with management are likely to increase their chances of outperforming the industry average.


20


AcknowledgementsKPMG, Directorbank and Private Equity Research would like to thank all the senior executives who took part in the research, particularly those who participated in in-depth interviews and provided important insights and contributions to this research.

TonyAlleeson

ChrisAllen

MarkAshcroft

MarkAsquith

NigelAtkinson

MichaelAverill

Klaus Beckmann

Robin James Best

Martin Boaler

Darryl Boulton

Stephen Bracegirdle

Peter Bridge

JohnCaines

IanCameron

AdrianCarey

JamesChapman

DavidCoates

RichardCooper

MichaelCovell

SimonCurtis

NeilDavidson

NevilleDavis

JohnADembitz

Robert De Regge

Ralph Deter

IanDugan

Gael Dutheil de Larochere

Stephen Edwards

Matthew Elson

Mathias Engel

Stephen Evans

Hywel Evans

John R Evans

Tony Evans

Bob Fairchild

Michael Fetherston-Dilke

AndrewFinn

Michael Fort

Suzy Frith

Philip H Gee

Wanda Goldwag

Ken Greatbatch

James Greenbury

Stephen Hallett

Keith Hamill

Kelvin Harrison

Jonathan Harrison

David Harrop

Kevin Hayes

CatherineHearn

Paul Hick

Graham Hill

AndyHorn

Lesley Howe

PaulStephenInsworth

Paul Jephcott

AlanJones

William Joss

John Kempster

AlbertKing

ChristopherKinsella

Edward Knighton

AxelKorn

SimonLaffin

NigelLambe

David Latimer

ArmandLauzon

Martin Leppard

Robert Macnaughton

Peter Manning

David Mason

Stephen Mcvey

Richard Mead

Fred Metzgen

Mark Minter

Richard Moore

Galvin Mould

Graham P Muir

Swag Mukerji

Dave Murray

Jerry Musnitsky

Paul Myerscough

JohnANicholson

StephenNixon

Philippe Op de Beeck

Kevin Ord

Roger Pedder

Jeff Perrin

Bill Ronald

Simon Rowe

Matthias Schneider

AlanSeigrist

Ron Series

AdrianSharpe

CharlesShaw

Tony Shearer

Brian Sherlock

John Simpson

Philip Smith

CliveSnowdon

Julian Spooner

Terry Stannard

Dick Steele

NickStimpson

IanStuart

AndyTaylor

NickTempleton-Ward

Tim Thexton

SirAlanThomas

MarkCThomas

Robert J Thompson

IanThornley

Peter Townsly

Kai Uebach

AlexWalker

Peter Waller

John Watkinson

Michael Watson

E J Watts

Richard Webster

David White

Richard W White

Duncan Wilkes

AlunWilliams

David Williams

Kelvin Williams

Peter Williams

David Wilson


21


KPMG Regional Heads of Private Equity

Robert OhrensteinGlobal Head of Private Equity KPMG in the UK T: +442073118849 E: [email protected]

Onno SloterdijkHead of Private Equity EMA Region KPMG in the Netherlands T:+31206567985 E: [email protected]

Marc MoyersHead of Private Equity Americas Region KPMG in the US T:+18047284260 E: [email protected]

Honson ToHead of Private Equity Asia Pacific Region KPMG China T:+86212122708 E: [email protected]

Directorbank

Ken BrotherstonExecutive Chairman Directorbank

T: +442072557940

E: [email protected]

AmemberoftheDirectorbankGroup,Directorbankisaunique‘executivesearchandboardinsight’resourceforthePrivateEquitycommunity.Theirclientbaseincludesmajorbuyouthouses,mid-marketfirms,venturecapitalenterprisesandadvisoryfirms.

Offeringdedicatedsupportthroughthepre-dealandportfoliomanagementstages,over60privateequityhousessubscribetoDirectorbank’s unique range of services to gain access to their network of high calibre board directors for deal origination, pre-deal scenarios,industry/strategicadvice,duediligenceprojects,interimassignments(includingturnarounds)andportfoliocompanydirectorships.Inaddition,Directorbank’ssectorspecialists,supportedbydedicatedresearchersandthewiderDirectorbankGroupteam, conduct executive search assignments for private equity clients leveraging their industry knowledge, sector insight and reach to identify, evaluate and recruit the strongest candidates in highly competitive timeframes.

www.directorbank.com

KPMGwasthefirstaccountancyorganisationtohaveadedicatedmulti-disciplinaryprivateequitygroup.Ourprofessionals,leveragingglobalexpertisefromotherareasofthefirm,areideallyplacedtohelpfundstoaddressthechallengesofthesemorebenign market conditions, exploit opportunities in high-growth developing markets and ultimately add value for your investors.

www.kpmg.com

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual orentity.Althoughweendeavortoprovideaccurateandtimelyinformation,therecanbenoguaranteethatsuchinformationisaccurateasofthedateitisreceivedorthatitwillcontinuetobeaccurateinthefuture.Nooneshouldactonsuchinformationwithout appropriate professional advice after a thorough examination of the particular situation.

©2013KPMGInternationalCooperative(“KPMGInternational”),aSwissentity.MemberfirmsoftheKPMGnetworkofindependentfirmsareaffiliatedwithKPMGInternational.KPMGInternationalprovidesnoclientservices.NomemberfirmhasanyauthoritytoobligateorbindKPMGInternationaloranyothermemberfirmvis-à-visthirdparties,nordoesKPMGInternationalhaveanysuchauthoritytoobligateorbindanymemberfirm.Allrightsreserved.

TheKPMGname,logoand“cuttingthroughcomplexity”areregisteredtrademarksortrademarksofKPMGInternational.

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Publication number: 121279|Publicationdate: January2013

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